At an event in London last week exploring the role of business in society, a top executive for a major UK high street bank was asked a brilliant question by a graduate working for the charity, Teach First. The graduate briefly outlined Teach First’s systems change ethos before asking what this bank was doing to transform its culture through the training and development offered to its intake. Cue accomplished but ultimately platitudinous answer. Followed up by comment about how we were all idealistic when we were young, but then we had to grow up.
This interchange stuck with me, bugged me, and at first I couldn’t figure out why, it was so inconsequential. But as the days passed it dawned on me that in that interchange, right there, could be the revolution. It could signal ‘game over’ for the high street banking behemoths, blissfully unaware of the extinction event that is about to overcome them.
Henry Porter wrote in the Observer this month that the internet ‘is the most revolutionary event in the human psyche since the first hunter-gatherers began to conceive of gods’. Could this event – unless the banks miraculously figure out how to adapt – wipe out the high street banking sector as we know it? Could they be to banking what Kodak is to digital photography, what the town crier is to Twitter, what the CD is to i-Tunes?
Last week my business was offered the £3m debt financing we’d requested from our top four high street bank, which represents less than one year’s cash generation. The offer included two different arrangement fees, onerous covenants, expensive legal fees and expensive margins. It is inflexible and requires us to ask permission to alter any of our plans. In their parallel, time-lord universe, we have to wait some weeks for an answer every time we ask a question, and we are absolutely not allowed to meet, or even talk to the person who makes the decision.
Back in the real world, we have high net worth individuals who are keen to offer us a lending facility. They will do this at lower cost, without the fees, more simply, with more sensible covenants. They will turn around decisions in hours or days, and engage in a relationship of mutual trust with us to support one another’s goals. If we were smaller and wanted to borrow less, we would probably go instead to a service such as Funding Circle, which has so far had over £245m lent through it since starting in 2010.
So what is a bank? Ultimately, it no more than an aggregation of (1) trust, and (2) judgement of risk.
Existing banks have lost trust and automated & outsourced their judgement of risk. They exist in glass cathedrals with bloated balance sheets, full of legacy liabilities, overheads and culture. Their huge, aging customer bases serve to anaesthetise and isolate them from the profundity of ‘the revolutionary event in the human psyche’ to which Henry Porter refers.
Meanwhile, adventurous young natives of the digital universe have set out to explore the land of high street banking, and a number of pioneers are establishing trust and demonstrating that they can utilise risk management data and tools to the same effect as the behemoths. But they have a number of advantages, including no legacy edifice, friction-free processes, a digital business culture and growing scale. Whilst growth rates of over 20% per month are impressive, the numbers are small. But it doesn’t take long for compound growth like this to balloon and for tipping points to be reached. In research published last week in the US, two thirds of millennials – those born between 1981 and 2000 – say that in five years the way we access money and pay for things will be completely different. Or, as the researchers put it, “traditional banks are becoming irrelevant”
Young people are not ‘growing up’ in the way that that top executive from the major UK high street bank did. They are, instead, using their revolutionary tool to create their own systems & structures. They are not, as is often suggested, apathetic. It’s just that a war of attrition with the establishment is all a bit 1960s.
Rather, the future is being designed without the consent, or even often the awareness, of the establishment. Those most alert are realising that their legacy structures are just beginning to wither, as the life-force starts to be diverted and channelled into places they never go and do not understand.
So, to the Teach First graduate I say this: do not be frustrated. As Gil Scott Heron said, the revolution will not be televised. So let us direct our frustration with the behemoths constructively, by laying the ground to ensure that The New is more just, open and inclusive than The Old.